Unemployment variation over the business cycles: a comparison of forecasting models

Abstract

Asymmetry has been well documented in the business cycle literature. The asymmetric business cycle suggests that major macroeconomic series, such as a country's unemployment rate, are non-linear and, therefore, the use of linear models to explain their behaviour and forecast their future values may not be appropriate. Many researchers have focused on providing evidence for the non-linearity in the unemployment series. Only recently have there been some developments in applying non-linear models to estimate and forecast unemployment rates. A major concern of non-linear modelling is the model specification problem; it is very hard to test all possible non-linear specifications, and to select the most appropriate specification for a particular model. Artificial neural network (ANN) models provide a solution to the difficulty of forecasting unemployment over the asymmetric business cycle. ANN models are non-linear, do not rely upon the classical regression assumptions, are capable of learning the structure of all kinds of patterns in a data set with a specified degree of accuracy, and can then use this structure to forecast future values of the data. In this paper, we apply two ANN models, a back-propagation model and a generalized regression neural network model to estimate and forecast post-war aggregate unemployment rates in the USA, Canada, UK, France and Japan. We compare the out-of-sample forecast results obtained by the ANN models with those obtained by several linear and non-linear times series models currently used in the literature. It is shown that the artificial neural network models are able to forecast the unemployment series as well as, and in some cases better than, the other univariate econometrics time series models in our test. Copyright © 2004 John Wiley & Sons, Ltd.

Inflation and Unemployment Forecasting with Genetic Support Vector Regression

“…In their approach, NNs present promising empirical evidence against the linear VAR models. Moshiri and Brown (2004) apply a back-propagation model and a generalized regression NN model to estimate post-war aggregate unemployment rates in the USA, Canada, UK, France and Japan. The out-of-sample results confirm the forecasting superiority of the NN approaches against traditional linear and non-linear autoregressive models.…”

Forecasting Asset Prices Using Nonlinear Models

“…Moreover, although no formal statistical tests were used, the forecasts of the TAR model appeared to be unbiased. Similarly, neural network models (Moshiri and Brown 2004) and nonparametric nonlinear models (Golan and Perloff 2004) were superior to linear models in forecasting the unemployment rate. In fact, Golan and Perloff indicate that their model is superior to the nonlinear TAR model.…”

Forecasting US Unemployment with Radial Basis Neural Networks, Kalman Filters and Support Vector Regressions

“…Skalin and Teräsvirta (2002) use multivariate STAR models to forecast unemployment rates. Moshiri and Brown (2004) apply a back-propagation model and a generalized regression NN model to estimate post-war aggregate unemployment rates in the USA, Canada, UK, France and Japan. The out-of-sample results confirm the forecasting superiority of the NN approaches against traditional linear and non-linear autoregressive models.…”